Service tax on foreign royalty payments was unsustainable for the pre-1-1-2005 period, with demand and penalties set aside.

Service tax could not be fastened on royalty paid to a foreign service provider having no office in India for the period before the service was expressly specified as taxable on 1-1-2005. The Larger Bench ruling was applied to hold that the recipient was not liable merely because of the amendment in Rule 2(l)(d) of the Service Tax Rules. Accordingly, the demand and penalties were held unsustainable, the assessee's appeals were allowed with consequential relief, and the Revenue's appeals were rejected.

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Issues: Whether service tax was payable on royalty paid to a foreign company having no office in India for the relevant period, and whether the demand and penalties could be sustained.

Analysis: The issue was governed by the Larger Bench ruling holding that a taxable service provided by a non-resident or from outside India, having no office in India, was specified as a taxable service only with effect from 1-1-2005 under Notification No. 36/2004. On that view, the recipient could not be fastened with service tax liability for the period prior to 1-1-2005, notwithstanding the amendment in Rule 2(l)(d) of the Service Tax Rules.

Conclusion: The demand of service tax and the penalties were held unsustainable, the assessee's appeals were allowed with consequential relief, and the Revenue's appeals were rejected.

Final Conclusion: Liability to service tax on payments to a foreign service provider without an office in India did not arise for the period in question, and the impugned demands and penalties were set aside.

Ratio Decidendi: A recipient cannot be made liable for service tax on services provided from outside India by a non-resident having no office in India for a period prior to the date on which such service was expressly specified as taxable.

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